Operations Management William J. Stevenson 8th edition

12 Aggregate Planning CHAPTER Operations Management, Eighth Edition, by William J. Stevenson Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin

Planning Horizon Aggregate planning: Intermediate-range capacity planning, usually covering 2 to 12 months. Short range Intermediate range Long range Now 2 months 1 Year

Overview of Planning Levels Short-range plans (Detailed plans) Machine loading Job assignments Intermediate plans (General levels) Employment Output Long-range plans Long term capacity Location / layout

Establishes schedules Planning Sequence Figure 12.1 Business Plan Establishes operations and capacity strategies Aggregate plan Establishes operations capacity Master schedule Establishes schedules for specific products Corporate strategies and policies Economic, competitive, and political conditions Aggregate demand forecasts

Aggregate Planning Inputs Resources Workforce Facilities Demand forecast Policies Subcontracting Overtime Inventory levels Back orders Costs Inventory carrying Back orders Hiring/firing Overtime Inventory changes subcontracting

Aggregate Planning Outputs Total cost of a plan Projected levels of inventory Inventory Output Employment Subcontracting Backordering

Aggregate Planning Strategies Proactive Alter demand to match capacity Reactive Alter capacity to match demand Mixed Some of each

Demand Options Pricing Promotion Back orders New demand

Capacity Options Hire and layoff workers Overtime/slack time Part-time workers Inventories Subcontracting

Aggregate Planning Strategies Maintain a level workforce Maintain a steady output rate Match demand period by period Use a combination of decision variables

Basic Strategies Level capacity strategy: Chase demand strategy: Maintaining a steady rate of regular-time output while meeting variations in demand by a combination of options. Chase demand strategy: Matching capacity to demand; the planned output for a period is set at the expected demand for that period.

Chase Approach Advantages Disadvantages Investment in inventory is low Labor utilization in high Disadvantages The cost of adjusting output rates and/or workforce levels

Level Approach Advantages Disadvantages Stable output rates and workforce Disadvantages Greater inventory costs Increased overtime and idle time Resource utilizations vary over time

Techniques for Aggregate Planning Determine demand for each period Determine capacities for each period Identify policies that are pertinent Determine units costs Develop alternative plans and costs Select the best plan that satisfies objectives. Otherwise return to step 5.

Cumulative Graph Figure 12.3 1 2 3 4 5 6 7 8 9 10 Cumulative production demand Cumulative output/demand

Average Inventory Average Beginning Inventory + Ending Inventory 2 =

Mathematical Techniques Linear programming: Methods for obtaining optimal solutions to problems involving allocation of scarce resources in terms of cost minimization. Linear decision rule: Optimizing technique that seeks to minimize combined costs, using a set of cost-approximating functions to obtain a single quadratic equation.

Summary of Planning Techniques Table 12.7

Aggregate Planning in Services Services occur when they are rendered Demand for service can be difficult to predict Capacity availability can be difficult to predict Labor flexibility can be an advantage in services

Aggregate Plan to Master Schedule Figure 12.4 Aggregate Planning Disaggregation Master Schedule

Disaggregating the Aggregate Plan Master schedule: The result of disaggregating an aggregate plan; shows quantity and timing of specific end items for a scheduled horizon. Rough-cut capacity planning: Approximate balancing of capacity and demand to test the feasibility of a master schedule.

Master Scheduling Master schedule Determines quantities needed to meet demand Interfaces with Marketing Capacity planning Production planning Distribution planning

Master Scheduler Evaluates impact of new orders Provides delivery dates for orders Deals with problems Production delays Revising master schedule Insufficient capacity

Master Scheduling Process Figure 12.6 Master Scheduling Beginning inventory Forecast Customer orders Inputs Outputs Projected inventory Master production schedule Uncommitted inventory

Projected On-hand Inventory Inventory from previous week Current week’s requirements - =

Projected On-hand Inventory Figure 12.8 Beginning Inventory Customer orders are larger than forecast in week 1 Forecast is larger than Customer orders in week 2 Forecast is larger than Customer orders in week 3

“slushy” somewhat firm Time Fences in MPS Figure 12.12 Period 1 2 3 4 5 6 7 8 9 “frozen” (firm or fixed) “slushy” somewhat firm “liquid” (open)